Five Industries That Benefit Most from Cost Segregation Studies

When it comes to maximizing tax savings and improving cash flow, property owners across different industries can benefit significantly from Cost Segregation Studies. This tax strategy allows businesses to accelerate depreciation, leading to reduced taxable income in the short term and immediate cash flow improvement. While Cost Segregation can be advantageous for any real estate owner, certain industries stand out as being particularly well-suited for this strategy. In this blog, we’ll explore five industries that benefit the most from Cost Segregation Studies and how they can unlock substantial financial advantages.

1. Commercial Real Estate

Commercial real estate owners—whether they manage office buildings, retail centers, or industrial properties—are among the top beneficiaries of cost segregation studies. These properties tend to have complex structures, including distinct components such as electrical systems, HVAC, lighting, and interior finishes, as well as significant amounts of land improvements. All of which can be depreciated at a faster rate than the structure itself.

Why it works:

• Commercial properties typically have long depreciation timelines under standard accounting methods, often taking 39 years. Cost segregation can accelerate depreciation for shorter-lived assets (like carpeting, lighting, sidewalks, and landscaping), allowing owners to depreciate these components over 5, 7, or 15 years instead.
• This accelerated depreciation can lead to significant tax deductions in the early years of ownership, improving cash flow and providing funds for reinvestment or other business expenses.

2. Hospitality Industry (Hotels & Resorts)

The hospitality industry is another prime candidate for Cost Segregation, with hotels and resorts being the most popular examples. The structures of these properties are typically large, complex, and filled with a wide array of assets, such as furniture, fixtures, equipment, and specialized systems like elevators and pools.

Why it works:

• Hotels and resorts often have substantial personal property (like furniture, flooring, and decorative elements) that can be depreciated over shorter timeframes, often just 5 or 7 years, rather than the standard 39-year timeline.
• In addition to the obvious tax benefits, the accelerated depreciation allows hotel owners to reduce their taxable income quickly, improving cash flow that can be reinvested in property upgrades or operational expenses.

3. Healthcare Facilities

Healthcare facilities such as hospitals, medical offices, and nursing homes often face significant capital expenditures when building or renovating their properties. From specialized equipment and complex medical systems to various interior elements (waiting rooms, exam rooms, and kitchens), these properties are perfect for a Cost Segregation Study.

Why it works:

• Healthcare facilities frequently have a mix of long-lived assets (like the building itself) and personal property (such as medical equipment, furniture, and flooring) that can be depreciated over much shorter periods. For instance, personal property in medical offices can be depreciated over 5 to 7 years.
• Cost segregation allows healthcare property owners to reduce their upfront tax burden and free up funds for improving services, upgrading equipment, or expanding facilities to accommodate increasing demand.

4. Retail (Grocery Stores, Shopping Centers, and Malls)

Retail properties—whether they’re grocery stores, shopping centers, or malls—are another industry that can benefit greatly from Cost Segregation. Retail properties often have a unique infrastructure, including specialized lighting, HVAC systems, shelving, and signage, all of which can be eligible for accelerated depreciation.

Why it works:

• Many retail properties contain assets that can be depreciated over 5 or 15 years, including things like shelving, display cases, and non-structural interior elements.
• Retail property owners can use cost segregation to unlock substantial tax savings that help offset operational costs, improve profitability, and fund renovations or new projects.

5. Industrial Real Estate (Manufacturing, Warehouses, and Distribution Centers)

Industrial properties such as warehouses, manufacturing plants, and distribution centers can significantly benefit from cost segregation due to their specialized equipment and infrastructure. These facilities often feature significant amounts of personal property that can be depreciated over shorter periods, such as machinery, loading docks, and shelving.

Why it works:

• Industrial properties often have a blend of short-lived assets (like racking systems, conveyors, and electrical equipment) that can be depreciated over just 5, 7, or 15 years, rather than the 39-year period for the building itself.
• Accelerating depreciation on these components reduces the taxable income of industrial property owners, freeing up cash that can be reinvested in facility improvements or expansion plans.

Conclusion

Cost Segregation studies provide valuable opportunities for property owners across various industries to reduce their tax liabilities and improve cash flow. While almost any real estate owner can benefit from this strategy, industries such as commercial real estate, hospitality, healthcare, retail, and industrial properties have the most to gain. By identifying and accelerating the depreciation of specific assets, businesses in these sectors can unlock substantial tax savings, providing them with the financial flexibility to grow, reinvest, and stay competitive.

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Edited by Randy Eickhoff, CPA, Founder & Head Coach at Acena Consulting. Photo courtesy of Dimitry B on Flickr.